Archives for July 2010

When I reported back in June that a revised European Union directive would have the effect of applying new rules on how bonuses are paid to more than 2,500 City firms - up from just 26 large banks right now - there was widespread scepticism (see my post, Crackdown on hedge fund pay).

However the FSA has today confirmed that is what will happen.

And the City watchdog points out that equivalent restrictions are also to be applied to insurers and most fund managers, including all hedge funds, when two other EU directives come into effect in 2012 and 2013.

However the FSA's consultation document on the implementation of the rules implies that it may in practice allow some firms to breach the pay restrictions, if those firms are not regarded as big enough or important enough to pose dangers to the stability of the financial system.

That said, many firms will henceforth be obliged to defer between 40% and 60% of any bonus over three years and to pay no more than half of any bonus in cash, as opposed to shares or other securities.

Many City firms won't like this infringement of what they see as their fundamental right to pay as much as they like to whom they like in whatever way they like.

But there's no escape from the rules within the Europe Union. And for big banks, there's very little hiding place anywhere in the world.

But for other financial firms, shelter from the official scrutiny may be obtained by fleeing to Asia or Wall Street or Switzerland.

They provide some kind of picture of the health and prospects of Britain's biggest companies.

What they show is that BigCo has come through the worst recession since the 1930s in better shape than some might have expected: typically their indebtedness has been falling gently and is at bearable levels; sales and earnings are flat or rising gently.

There's a strong emphasis in their respective announcements on containing or reducing costs: Shell boasts of enormous $3.5bn annualised cost savings that it has made; BAE cut headcount by 3,300 in the first half of the year; all BT's profit growth came from reduced operating costs; AstraZeneca is closing two major research sites; at Shell, net capital investment is broadly flat; at Reed, the emphasis is all about generating cash in a climate where demand from business and professional users is flat.

And although they all talk the talk of investing for the future, in practice they are maintaining investment rather than increasing it: investment in research and development at Rolls-Royce was flat at £436m in the first half; capital expenditure at BT fell in the first quarter; at AstraZeneca there's very tight control of investment.

Now the one outlier or anomaly is British Sky Broadcasting, which happens to be the most domestic and the most consumer facing of all the businesses. What is striking about BSkyB is that its emphasis is on containing cost growth rather than cutting costs. It significantly increased investment in new programmes and content and it is putting money into new services (such as 3D TV).

So what does all this mean for the British economy?

Well it would be dangerous to draw firm conclusions, even from the results and expectations of seven such big companies, partly, of course, because all of them (except BSkyB and to a lesser extent BT) are very international, both in terms of where they employ people and where they sell their stuff. Arguably they're only British in the sense of where they have their respective head offices.

But their plans do pose something of a challenge to the government's hopes of a "balanced" economic recovery in the UK.

In a climate where public spending is being slashed and where British consumers cannot and should not be relied on to increase spending, because of the imperative of paying down their record debts, it really matters that BigCo invests more in the UK, employs more people in the UK and exports more.

At some point, all of that will of course happen. But it is not obvious from the results and expectations of these seven companies that the revival of business leaders' animal spirits will happen sufficiently quickly to prevent economic growth in the UK being anaemic to the point of non-existence for some considerable time to come.

Earlier this week, the so-called Basel Committee on Banking Supervision - the supreme decision making body for global banking regulation - decided to delay till 2018 the implementation of new rules that would strengthen banks.

Which is so far off that some would query whether those rules will ever really be implemented.

But Mervyn King, the governor of the Bank of England, told MPs today that more rapid implementation would have risked snuffing out our fragile economic recovery, because the effect of the new rules would have been to deter banks from lending.

As for investors, they love the delay: shares in banks have surged relative to other shares in the past few days.

Why is that? Well the new rules would force some banks to raise billions of pounds in new capital as a buffer against potential future losses. And whenever banks issue shares to raise capital, that reduces the value of existing shares.

Here's the paradox: investors positive reaction and the rise in banks' share prices will tend to reinforce economic growth and should thus strengthen banks; but if there turns out to be another banking crisis before 2018, banks may not be in optimal shape to cope with it.

PS I intend to write a longer analysis of Monday's revisions to the proposed Basel lll rules on banks' capital adequacy. There are reasons to be concerned about the foundations and philosophy of this attempt to learn the lessons of 2008's banking meltdown.

It is very difficult to describe a $17bn loss for three months of trading as a sparkling performance.

But for BP it could have been a lot worse - in that its estimate of the cost of the Gulf of Mexico oil spill of $32.2bn was less than some analysts have feared BP would end up paying for the clear up, compensation to those damaged and fines - and that's because BP believes that it will not be found guilty of gross negligence in relation to the disaster.

That said, in an interview with me, the chairman Carl-Henric Svanberg said there was no 100% certainty the final bill for the spill wouldn't be higher.

BP will pay for all this by selling assets worth $30bn - which Mr Svanberg insisted would not eat into the core of the business.

He also praised the long record at BP of the outgoing chief executive Tony Hayward, while saying that Mr Hayward was not the right man to lead the rebuilding of the business.

He defended the financial settlement with Mr Hayward - under which Mr Hayward will receive a one-off payment of over £1m and a £600,000 pension for life from the age of 55 - as no more Mr Hayward's contractual due.

Update 1045: Probably the most important statement made by BP today is that it doesn't believe that it has been "grossly negligent" in relation to the oil disaster in the Gulf of Mexico and under the terms of the US Clean Water Act.

As I've mentioned before, its confidence that its culpability is less than some have feared stems from its recent success in capping the well: because there have not been further fractures of the well as internal pressure has risen, BP has a defence against the charge that it cut corners in the design of the well.

Now according to my calculations, if gross negligence were proved, it would pay almost $20bn in penalties under the Clean Water Act (that's a penalty of $4300 per spilled barrel at an estimated daily flow rate of 50,000 barrels for around 90 days).

By contrast, if BP is right and it hasn't been grossly negligent, then the penalty drops to just under $5bn (because the penalty in those circumstances would be $1,100 per barrel).

Now BP's loss of $17bn is based on a provision for that lower penalty. So it's no exaggeration to say that BP's financial rehabilitation rides to no small extent on its ability to prove that its negligence was not of the gross kind.

All that said, it's worth noting that under accounting rules BP has been forced to calculate its liability for the oil spill costs on the basis that it bears all of them.

In practice, it may be able to recover 35% of much of the cost from the well partners, Anadarko and Mitsui.

But just to look on the dark side again, BP's $32.2bn pre-tax charge for the spill includes no allowance for any fines or penalties other than those under the Clean Water Act - and given the sheer number of government bodies that are investigating BP, it may not be safe to assume (as BP concedes) that there will be no other fines or penalties.

Tony Hayward will be able to draw a pension of around £600,000 a year from the moment he leaves the company on October 1, I have learned.

This is his contractual entitlement under the company's pension scheme. The rules of the scheme say that those who joined it before April 6 2006 can take the pension at any point from age 50: Mr Hayward is 53.

However the pension entitlement is bound to be hugely controversial.

Mr Hayward's pension pot had a transfer value on 31 December 2009 of £10.8m, and he had accrued a pension of £584,000 a year. The pension pot will be worth more than that by the time of his departure.

The terms of Mr Hayward's departure from BP have been agreed by the company's board.

He will be succeeded by Bob Dudley as chief executive.

Mr Hayward is not being sacked but is leaving by mutual agreement, so the board feels it has to honour the terms of its contract with him.

He will therefore receive a year's salary plus benefits. That's worth more than £1m.

He retains a right to any bonus that's paid to senior executives this year, but bonuses won't be decided till the end of the year (by way of an aside, it would be slightly odd - to put it mildly - if any bonuses were paid for 2010, a year in which the company will declare a record loss).

And he will retain entitlement to shares under the long-term performance scheme, which - depending on BP's recovery over the coming years - could eventually be worth several million pounds

Mr Hayward is not severing his links with BP completely. He will become a non-executive member of BP's joint venture in Russia, TNK-BP (a part-time role) - largely because, I am told, his Russian contacts and knowledge are valuable.

UPDATE 0725: Hayward's circa £600,000 per annum pension turns out to be payable in 18 months, age 55.

For those who care, BP's own pensions website says that BP employees of Hayward's vintage can take their pensions at 50. And a senior BP executive, licensed to talk about these things, told me that Hayward's pension was payable to him immediately.

Today BP are saying that they got it wrong, that his pension will be paid when he is 55. They are amending their website.

There is nothing conditional about the departure of Tony Hayward from BP, or his replacement as the company's chief executive by Bob Dudley.

It is going to happen. And it will be announced first thing tomorrow morning.

Or at least that is what will take place, unless a whole series of senior people at the top of BP are playing an elaborate practical joke on me and on the rest of the media, by telling us that's their plan.

Wouldn't it be a hoot if BP's statement tomorrow actually said "fooled ya! Tony Hayward is staying for another five years"?

As you'll have gathered if you've been following this story, confirmation of Mr Hayward's tenure is not a realistic possibility.

So why on earth did BP put out the following statement this morning?

"BP notes the press speculation over the weekend regarding potential changes to management and the charge for the costs of the Gulf of Mexico oil spill. BP confirms that no final decision has been made on these matters. A Board meeting is being held on Monday evening ahead of the announcement of the second quarter results on 27th July. Any decisions will be announced as appropriate."

Now of course I understand that the members of BP's board wish to demonstrate that they are in charge of important decisions such as who runs the company. And of course they don't wish to be seen to be bossed around by media leaks.

It is understandable that they wish to make choices and announcements on who is staying and who is going on their own timetable.

But the decision on Mr Hayward's exit has already been taken, to all practical purposes, even if it hasn't been ratified in a formal sense by the full board.

Now I am told there is still some uncertainty about the precise timing of the handover from Mr Hayward to Mr Dudley.

Even so, when it became clear over the weekend that the story about Mr Hayward's departure was out, most companies would have accelerated discussion of that timing issue: emergency board meetings can always be held by telephone.

So here's the interesting question. Has the board of BP struck a blow for institutional freedom from the tyranny of media pressure by refusing to confirm or deny what's already in the public domain?

Or has it showed that in the media age of blogs, Twitter and Facebook, it is still inhabiting a world of telegrams and carrier pigeons?

By the way, over the years BP hasn't altogether shunned the dark arts of spin and "controlled" leaks, so it can't really be claiming to be taking a stand for the supposedly old-fashioned virtue of pretending the media doesn't exist.

The danger for the BP board is that in refusing to be rushed, it creates an impression of being inflexible and unresponsive.

Update 0942: An individual with close knowledge of BP tells me that one reason for the delay in the formal announcement of Mr Hayward's departure is that - as of yesterday - there hadn't been an agreement on severance terms for Mr Hayward.

Apparently there's a good deal of agonising about the "political reaction" to a financial settlement with Mr Hayward which would see him leaving with a very substantial sum of money.

The question is what he'll receive in addition to a pension pot that was worth £10.8m at the end of December and a contractual entitlement to a year's salary, which is £1.045m?

BP's board will want to be fair to Mr Hayward. But putting that aspiration into concrete financial terms is fraught with dangers, especially in this putative age of austerity.

That inevitability will be crystallised imminently: Mr Hayward is negotiating the terms of his departure, I am told by a senior BP source.

An announcement that he is going is likely to be made in the next 24 hours. And the strong likelihood is that he'll be replaced by his US colleague, Bob Dudley, who has been put in charge of the clean-up operation in the Gulf of Mexico.

Why now?

Paradoxically, the bad news for Hayward is that there has been better news for BP.

It has been widely agreed on the BP board for some time that the damage to the company's reputation and finances that was caused by Macondo oil spill required a change of leadership at the top, the act of catharsis that shows the company "gets it".

But directors also felt that the sacrifice of Hayward should not happen until serious progress had been made on staunching the oil leak and until it was possible to quantify the financial cost of fixing the hole, providing compensation and paying fines.

Well in the last couple of weeks, there has been such progress: BP's results due on Tuesday will contain a provision of perhaps $30bn for the Macondo costs; and a new cap on the well has stemmed the pollution, pending the permanent sealing of the well.

So Hayward's presence, as the executive who absorbs all the opprobrium heaped on BP, is less valuable than it was. And if the moment has more-or-less arrived for BP to start building a post-Macondo future, then it also needs a new public face, a new leader.

However, what will be bitter-sweet for Hayward is that evidence has emerged over the past few days that BP was less culpable for the disaster than many of its critics believe and that the charge of gross negligence against it may not stick.

The worst outcome for BP would have been proof that it cut corners in the design of well. But as I mentioned last week, the fact that the new cap on the well has staunched the flow of oil suggests that it is robust.

UPDATE, 16:48: In an informal sense, the departure of Tony Hayward was agreed by BP's directors in the past few days.

It will be ratified at a formal board meeting before BP's results on Tuesday - and, as I said earlier, Bob Dudley is expected to be named as Mr Hayward's successor.

Although Mr Hayward is being pushed out, those at the top of BP say that the imminence of his exit was in part chosen by Mr Hayward.

I have learned that every major international bank headquartered in the European Union has passed the stress tests.

Only a small number of regional banks (fewer than ten) have flunked and will be forced to raise additional capital.

On the face of it, the results of the health checks on Europe's banks are therefore good news.

Regulators will claim that the European Union's financial institutions are in better shape than many investors and creditors believe.

But some will argue that the tests simply weren't demanding enough, as per my notes in recent days.

What's the bottom line? There are no great new shocks to scare investors and creditors, but nor will there be much reassurance for those who believe that Europe's banks in general need strengthening.

UPDATE 17:25

Only seven banks - all of them fairly small - flunked the tests of whether they're strong enough to withstand further financial shocks.

And those weaker banks, which are in Greece, Spain and Germany, need a mere €3.5bn or £3bn of new capital to meet meet the standards required by regulators.

That's not really going to test the ability of either European taxpayers or investors to provide equity finance.

So regulators will claim that the European Union's financial institutions are in better shape than many investors and creditors believe.

But some will argue that the results simply weren't demanding enough.

What was measured was whether the 91 banks have enough capital to aborb the losses that would be generated if the European economy slowed down by 3 per cent compared with the EU's official forecast and if the price of government bonds fell by 23 per cent for Greece, 10 per cent for the UK and 4.7 per cent for Germany (inter alia).

The problem with these scenarios is that the real world could turn out much worse. The Greek government could in theory default on its debt - which would lead to much bigger losses for banks.

And, of course, the European Union could fall into a much worse recession.

Also there are those who believe that the regulators have been unduly kind to banks - especially French and German ones - by allowing them to count as capital certain liabilities that in practice are useless at absorbing losses.

So it's very unclear whether banks' creditors will be reassured or unsettled by the stress test results.

The weekend will be an anxious time for banks, as they wait to learn whether it'll become easier or harder for them to borrow, when markets open on Monday.

UPDATE 18:58

How severe were the tests imposed on EU banks?

Well what we've learned tonight is that under the so-called adverse scenario, banks were instructed to assess what losses they would suffer if EU GDP was flat this year and contracted by 0.4 per cent in 2011.

Now in practice that may turn out to be considerably worse than reality. But does it really represent the kind of harsh conditions we'd want and need our banks to survive?

Well, just last year the economy of the EU actually shrank by 4.2 per cent.

So it's clear that banks are not being told that they would have to withstand the kind of hurricane they faced only a year ago.

What size of aggregate losses would this adverse scenario actually generate for banks?

Well, aggregate impairment and trading losses for banks would be €565.9bn over the coming two years, according to official estimates.

Which sounds like a lot of money. But only amounts to €3bn per bank per annum - and doesn't sound enough to represent a credible test.

Of this, banks would suffer €38.9bn of losses on their holdings of government bonds in their trading books. Which again looks unrealistically small in the context of EU sovereign debt of €8.7 trillion - given that much of this lending to EU governments has come from these banks.

The good news is that all the 91 banks have been forced as part of this exercise to disclose how much of their lending to governments is held in their banking books, as opposed to their trading books, and is therefore deemed to be impermeable to losses.

The bad news is that analysts now have plenty of new data, which will allow them to run their own stress tests based on assumptions that they would regard as more realistic.

Which means that banks may find that investors and the market will make a rather different judgement from EU regulators about which banks are too weak.

The widespread concerns that the tests simply aren't severe enough would not matter so much if the stresses that banks will actually face over the next two years or so turn out to be fairly mild.

Think of it as the equivalent of testing the robustness and integrity of an aeroplane. The prudent thing to do is recreate the conditions of a Force 10 gale or worse and see if the plane stays in the sky in such hideous conditions.

But if, in the engineering test, all that's simulated is a Force 5 gale, that wouldn't matter quite so much if in practice the relevant plane were never to fly through anything windier than that.

Which is why for banks' creditors and investors, yesterday's news that manufacturing and services output in the EU - and especially in Germany - appeared to be growing faster than expected, well that was encouraging.

The Purchasing Managers Indices indicated that EU growth may be picking up a bit of momentum. Which might mean that over the next year or two, the worst that confronts the banks will be a Force 5 gale, rather than a tornado.

But here's the thing: most of us wouldn't chose to fly in a plane that couldn't prove its ability to remain airborne through a tornado. And, over time, creditors, depositors and investors will shun banks that have insufficient capital and liquid resources to withstand substantial financial shocks.

That's why it's not just the results of the stress tests that matter, the publication of which banks have failed and need to raise capital: all the indications from governments, regulators and banks are that there won't be many of those.

So as important as the test results will be the new details provided tonight by Europe's banking regulators on the calibration of the adverse financial and economic conditions that the banks would have to endure.

As I've mentioned before, there are reasons to believe that the simulated macro-economic scenarios and the translation of those scenarios into loan and investment losses simply aren't severe or demanding enough.

Banks have had to prove that they can cope with a comparatively mild recession, with falls in government bond prices of up to 25% (in the case of Greece) but not default by governments, and with losses when other creditors default that are less than for the UK's equivalent stress tests.

What's more, two other arguable flaws in the tests are the Basel II definition of capital employed in the tests and the minimum ratio of capital to assets that banks have to prove they can preserve (see my note, Eurozone: Stressful 'haircuts' for why a 6% Tier 1 ratio under the Basel ll definition would allow some banks to disguise their intrinsic frailty).

Probably the best that can be said of the stress tests is that at least we should have a lot more information about the risks being run by Europe's biggest banks.

Transparency is almost always a good thing. But if the perception were to take hold that banks' weaknesses had been revealed but not corrected, that could undermine the confidence of creditors and investors in Europe's banks.

So what do investors and creditors actually expect the tests to reveal?

Well, Goldman Sachs has just published a fascinating survey of their views on the tests.

Here are the results: 10 of the 91 banks won't pass the test; just under 40bn euros of new capital will be raised, with roughly half being provided by taxpayers; and banks in Spain, Germany and Greece are expected to raise the most capital (d'oh!).

Perhaps more tellingly, some 37% of the 376 big investors who were polled fear that even after the stress tests and capital-raisings, European banks will still have too little capital.

That carries a slightly nerve wracking implication for European banks and regulators - which is that if fewer than 10 banks flunk the tests, and if the banks are obliged to raise significantly less capital than 40bn euros, there's a danger that investors will regard the tests as lacking credibility.

If the tests are perceived to lack credibility, they'll have solved very little, in that some European banks would continue to find it difficult to borrow from other banks and financial institutions - and the history of the past three years (and the history of the last few hundred years) shows that can be a precursor to meltdown.

The stress tests of 91 European Union banks - whose results we'll be given on Friday - are built on a paradox that some will see as delicious, and others as insane.

That paradox relates to the treatment of sovereign debt, the borrowings of governments like that of Greece that have taken on financial commitments way beyond what looks prudent.

Now these assessments of the financial strength of banks allow that the market price of sovereign debt may fall. In the case of Greece, banks have been instructed by regulators to factor in falls in the price of that debt of around 23 or 24% (a bit more than regulators first indicated).

So if banks hold government bonds, such as those issued by Greece, in their so-called trading books, then those banks have to prove that they are strong enough to withstand fairly substantial losses on those bonds.

But the European Union's governments, central bankers and financial regulators are not prepared to admit the possibility that an EU government could actually default on its debts - even as part of the totally theoretical exercise of the stress tests.

So if banks hold government bonds, such as Greek government bonds, in their "banking" books - and thus intend to hold those bonds till they mature or come up for repayment - then those banks would not have to recognise even 1% of potential loss on their bond holdings.

And never mind that analysts fear Greece will ultimately be forced to write off some 50% of its national debt.

Now I've highlighted this contradiction in an earlier post (see Eurozone stress tests that stress investors). And I made the point that this refusal to admit the possibility that Greece (or Spain, or Portugal, or Italy, or even the UK) could default means that it's impossible to be confident that Europe's banks hold enough capital to withstand potential future losses.

But what's worse, in a way, is what this dichotomy reveals about EU attitudes to markets. On the one hand, the leaders of Europe concede that the price of government debt on markets may rise and fall by very significant amounts. But if a steep fall in the market price can never be the precursor of default, then Europe's governments and financial authorities are implying that any movement in the price of European sovereign debt is always based on a fallacy.

Now it's all very well to argue that markets are frequently wrong. There's plenty of evidence of market prices overshooting in boom years and undershooting in lean years. But it is something different altogether to say that when the price of Greek debt falls by a quarter, that can never betoken a possible default by the Greek government.

Even the IMF, run after all by a Frenchman, seems somewhat bemused by the extreme anti-market bias of the most powerful EU country, Germany.

In its latest assessment of euro area policies, it criticises the German government for failing to address the weaknesses of some of its banks. But more tellingly, it says that "Germany's unilateral ban on selected short selling does not appear well-founded in the absence of proven market abuse".

The IMF says the great variations in the price of insuring the debt of different eurozone members that we saw in the spring was "well explained by fundamentals, ie deficit and debt ratios and EMU membership (with a discount for peripheral countries and Italy) in most countries, including Germany".

In other words, the German allegation that these variations were the result of rapacious speculation - short selling of these insurance contracts in the form of credit default swaps - is a canard, according to the IMF.

All of which is a roundabout way of saying that there is a potentially fatal flaw in the European Union's rationale for conducting the stress tests of banks.

EU states have carried out these evaluations of their respective banks in order to reassure investors and markets. But if in the very act of trying to reassure these investors and markets, EU governments and regulators are in effect saying that these investors and markets are always misguided, then it's very doubtful those investors and markets will derive any reassurance from the stress tests.

Far more likely is that they'll take one look at the results of those stress tests and conclude it's all a tawdry attempt to pull the wool over their eyes.

So the consequence of the stress tests - not immediately perhaps, but progressively as summer turns to autumn - may be to rattle and unsettle the institutions that provide vital finance to Europe's banks. And as I've noted before, the stress tests may ultimately lead to catastrophic real-life stresses on banks vital to the prosperity of Europe.

BP's sale to Apache for £4.6bn of oil and gas assets in Canada, the US and Egypt takes it most of the way to hitting its short-term target for the funds it wants to raise to meet the vast costs arising from the Macondo oil spill.

The chairman, Carl-Henric Svanberg, says there will be other opportunities to sell assets that he claims will be worth more to others than to BP. Or to put it another way, the company has taken a strategic decision to shrink.

But how much smaller will BP become? Will it ultimately decide that all or most of its market-leading American operation is worth more to another company that unlike itself isn't regarded as public enemy number one in the US.

At the moment, BP hopes it can retain a substantial US presence. An exit would represent a u-turn on the strategy that drove the company for the best part of the last 20 years.

This would not be an apposite moment to make the definitive judgement of whether to exile itself from America. Emotions in the US about BP are running so high - witness the determination of Washington lawmakers to implicate BP in the release of the Lockerbie bomber - that it's impossible to take a reliable reading of whether BP will be non-grata among American politicians and citizens forever.

That said, the recent progress on the twin imperatives of fixing the Gulf of Mexico leak and avoiding bankruptcy means the board of BP has to start preparing itself to make the really tough decisions.

In that sense, the 28% recovery in BP's share price since the end of last month is a message to the directors - especially the non-executives - that reconstruction is about to supersede firefighting as the priority.

These are the questions.

Quite how radical does BP need to be in breaking up its vast sprawling network of assets? What is the optimal size and structure for an oil company to manage the risks that have been exposed by the Macondo disaster?

And then there's that awful conundrum for a unitary board of BP's sort: to win back the confidence of shareholders and of the US government, do BP's non-executives need to start negotiating the departure terms for the chief executive, Tony Hayward, the chairman, Mr Svanberg, or both?

Update, 11:32: I hadn't appreciated the full financial significance of BP's current attempts to cap the Macondo well (as opposed to sealing it, which is the next stage).

If BP succeeds in shutting off all flow of oil from the Macondo well for an extended period through the installation of the so-called capping stack - which may happen this weekend - that would go some way to proving that the design of the well is not fundamentally flawed, that the well has integrity, that it can withstand significant pressure without springing new leaks.

This really matters, because much of the criticism of BP - especially from Congress - is that the company cut corners in the design of the well to save money; and that charge would be much harder to prove if the well remains intact when subject to increased internal pressure.

There would be a number of positive benefits for BP from such an outcome - one of which would be a diminution in the size of potential fines and penalties it faces to the tune of several billions of dollars.

Also, it would imply either that more-or-less any oil company could have suffered the same disaster, or that the contractors on the project, Halliburton and Transocean, have a great deal to answer for.

Either way, BP would find itself in a much better place - one in which the Macondo disaster became more of an industry-wide issue than just a horror story called BP.

Stephanie Flanders and I have written four short essays on the eurozone's financial and economic woes for Radio 4's PM. Here's the second of mine.
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There's a great deal of talk about whether eurozone taxpayers will have to bail out their banks, when we have the results on 23 July of tests by regulators to assess their respective weaknesses.

But this is to ignore that only a few weeks ago there was an initial billion dollar bailout of European banks.

You may have missed it, because it wasn't called a bank rescue programme.

It was a financial support package for Greece worth 110bn euros - and 750bn euros of credit for other eurozone governments that may face difficulty keeping up the payments on their debts.

On the face of it therefore this was aid for eurozone states.

But in practice it was succour for German banks, Spanish banks, French banks and so on, because it is those banks that lent hundreds of billions of euros to the likes of Greece, Spain, Portugal and Ireland - and if those countries were unable to keep up the payments on their so-called sovereign debts, well the immediate pain would be felt by banks which had lent to them.

What is troubling, however, is that the creditors of Europe's big banks fear that the billion dollar rescue package wasn't enough - that some eurozone banks face substantial losses and that they have too little capital to absorb those losses.

It is not just that these banks are perceived to have lent too much to governments - like that of Greece - which have been living beyond their means.

They've also provided too much finance to property developers and home-owners in markets - such as those in Spain and Ireland - that have gone from boom to bust.

And there's a final cause for concern among those who provide vital credit to banks. What they see in the eurozone are arrogant lenders which characterised the banking crisis of 2008 as primarily the fault of American and British banks - and which therefore did not follow the lead of American and British banks in strengthening themselves by raising vast amounts of new capital.

The statistics that are available would tend to support these fears about the relative weakness of the eurozone's financial sector.

That said finance ministers and government heads insist that the anxieties are exaggerated.

They've asked regulators to examine 91 European banks and adjudicate on whether they have sufficient capital resources to insulate them from a possible return to recession and squalls in markets.

These so-called stress tests on banks must surely be a jolly good idea - if, that is, they reassure banks' creditors that the risk of lethal losses materialising in eurozone banks is minimal.

Except for one thing.

There is a widespread view that the simulated stresses imposed on the banks are too feeble - they're the equivalent of seeing whether an aeroplane is airworthy by flying it only in choppy weather, not a tornado.

If the eurozone's banks pass their stress tests only because the tests are unrealistically easy, then those banks will remain acutely vulnerable to the ebbs and flows of confidence and sentiment among those who lend to them.

Or to put it another way, stress tests that lack credibility could be the mother and father of a new banking crisis, with the fault-line running from Madrid, to Paris to Berlin - rather than - as happened last time - from New York to London.

For most of us, $550m is a colossal sum of money - and it is the largest ever penalty extracted from a Wall Street firm by the US Securities and Exchange Commission.

But some will argue that Goldman Sachs got off lightly in this settlement of the charge that it misled investors when selling them a so-called collateralised debt obligation called Abacus 2007-AC1.

Goldman has not admitted the charge, but it has acknowledged that marketing material for the CDO was "incomplete" - in that the firm didn't disclose that a hedge fund, Paulson, helped select the investments that went into the CDO, and that Paulson was planning to bet the CDO would collapse in value.

When Abacus 2007-AC1 duly did collapse in price, Paulson made a bundle - and two investors, IKB and Royal Bank of Scotland, lost $150m and $841m respectively.

In respect of the deal in isolation, $550m looks like a hefty fine. But it is only 1.2% of Goldman's net revenues last year of $45.2bn and just 3.4% of bonuses and salaries paid to staff.

It is what you might call grit in the Goldman wheel rather than a fundamental challenge to the way it does business.

As for the recipients of the $550m, $300m goes to the US Treasury, $150m to IKB and $100m for Royal Bank of Scotland.

For lossmaking RBS, every little helps - but this really isn't life-changing, as its just 0.17% of 2009 revenues.

RBS is consulting its lawyers about whether there's any chance it can extract more from Goldman.

It's certainly been an annus horribilis for Goldman - pilloried as it's been by media, regulators and politicians for week after relentless week.

But there is significant comfort to be had for Goldman and the rest of Wall Street, in that their profitability doesn't look hugely threatened by the financial regulatory bill that finally - after so much lobbying, political horse-trading and re-drafting - obtained congressional approval yesterday.

There'll be tighter oversight of derivatives trading - with much of the business directed through clearing houses and central repositories in the hope it becomes more visible. The supposedly riskiest derivatives business will be forcibly separated into separately capitalised affiliates.

Also investment banks will have to demonstrate that their trading activities are explicitly for the benefit of clients rather than for themselves, with trading for their own account - or proprietary trading - banned. Which will lead to an overhaul of the money-making practices of Goldman in particular.

In a related reform, investment banks' direct investments in hedge funds and private equity must shrink (over time) to no more than 3% of their capital.

None of which is trivial for the likes of Goldman, JP Morgan, Morgan Stanley, or even the UK's Barclays Capital (owner of the rump of Lehman). Wall Street is paying for its contribution to the worst banking crisis since the 1930s.

But the new regulatory tariff is not life threatening: Wall Street's history demonstrates that in the ruthless pursuit of profit, few firms on the planet are more adaptable.

Update, 08:28: This may make you chuckle: apparently Royal Bank of Scotland had no idea it was in line for a slug of the SEC penalties paid by Goldman, so it regards the $100m it has netted as something of a windfall.

And RBS's lawyers continue to review whether it has a case for independent legal action against Goldman to recover the rest of that $841m.

RBS would argue that it hasn't been short changed by the SEC settlement with Goldman, but that the $100m is a lottery win (well, almost).

The chief executives of Britain's biggest banks are trooping in to see the chancellor today, to discuss how a second credit crunch can be avoided.

There are two issues. First, why aren't banks lending more to businesses right now? Second, how can a sharp squeeze in their ability to lend during 2011 and 2012 be avoided?

The first credit crunch led to a reduction in the rate of growth of bank lending to businesses that started in the summer of 2007. Month after month of reductions in the flow of credit culminated in a contraction of business lending of more than 10% per annum a year ago.

The crunch is still showing its effects, with the take up of business loans from banks still shrinking at more than 3% a year, according to Bank of England figures.

What's going on?

Here is what Andrew Tyrie, the new chairman of the Treasury Select Committee, told the annual conference of the British Bankers Association:

"My fellow MPs are acutely aware that sound local businesses are unable to find banking support at sensible prices."

A rather different message was delivered by Stephen Hester, chief executive of the UK's largest business lender, Royal Bank of Scotland. He said:

"RBS alone extended over £40bn in new facilities to business in the UK last year, and £45bn in credit facilities are still available but remain unused. 85% of SME (small business) applications for lending are successful".

He made two further points. First, that banks make an unacceptably low return on their lending to small and medium size enterprises, that they "do not even recover their cost of capital from SME lending".

That rather implies that RBS and the other banks aren't desperately keen to lend to businesses. But Mr Hester insists that the supply of credit isn't constrained.

What's happening, he insists, is that "businesses, unconfident of demand for their own goods and services, and recognising that debt was perhaps too high in recent years, are often seeking to reduce financial risk".

Or to put it another way, Mr Hester argues that what's driving the statistics that show a decline in business lending is that businesses don't want to borrow: with the economic outlook somewhat opaque, businesses are nervous about increasing their debts to finance working capital and investment whose returns look uncertain.

The chancellor will, of course, be aware that this is the banks' position, because they've been banging on to this effect for the best part of 18 months. But he'll hear it again today, from John Varley, chief executive of Barclays, who is today acting as shop steward for the bankers in their meeting with him.

What's the truth of it all? Probably not that there's currently an acute shortage of business credit but that there's a chronic, longstanding problem of mismatch between the kind of finance that smaller businesses want and what banks are prepared to supply.

However, the bigger issue for today's meeting is that there could be an acute shortage of credit in less than a year.

You'll remember the Bank of England's recent warning that the banks need to find £800bn of funding over the coming 30 months to replace taxpayer support that has to be repaid and bonds that are maturing (see my post, The risks of forcing banks off welfare) - and that the banks are currently raising nowhere near enough new money to refinance all this.

Which presents a pressing problem for the chancellor. Does he roll over £285bn of taxpayer lending to the banks, with the risk that this becomes perceived as a semi-permanent liability and is therefore added to official or unofficial calculations of a national debt that's famously rising too fast?

Or does he stick to the timetable for withdrawing financial support for banks, knowing that this could force banks to massively reduce the amount of credit they provide to businesses and households?

Nor is that the only potential obstacle to the flow of lending.

Again, you'll be aware from this blog that the banks are acutely concerned that if they are forced to strengthen themselves against future crises too rapidly - if they are obliged to raise a significant amount of new capital within the next couple of years or increase their stock of liquid assets or move quickly towards balance between loans and customer deposits - that again could spark something of a crunch to credit provision.

Probably the best way of seeing this is from the Bank of England's calculation that every 1% increase in British banks' ratio of equity capital to assets would require them to raise £30bn of new equity.

On the assumption they were able to raise this, it would force them to increase by 0.07% what they charge for their loans - in order to pay the dividends on the new equity that investors would demand. Which may not sound a huge increase in the cost of borrowing for businesses and households, but every little hurts, as they say.

But in practice, and in the short term, banks would endeavour in part to meet the new targets for capital ratios by shrinking their balance sheets. Or to put it another way, they would lend less.

How much less? Well if British banks endeavoured to increase their equity capital ratios by 1 percentage point exclusively by shrinking their balance sheets, that would see them lending a staggering £600bn less on a risk weighted basis (based on 2008 figures) and £1800bn less in respect of gross assets (equivalent to rather more than the output of the British economy).

Now the withdrawal of credit on that scale very quickly wouldn't lead to a return to recession - it would probably engender a full scale depression.

Which is why there is no serious argument against the phasing in of these new capital requirements - although there is still plenty of argument to come over the precise length of the timetable for implementing them.

The big point however is that one of the biggest threats to the UK's (and the world's) economic recovery is a possible second credit crunch. And for all the importance of George Osborne's recent budget, his soon-to-be published discussion paper on bank lending will also be of some economic significance.

In the assessment of whether European banks are strong enough, a really important issue is what kind of discount or "haircut" should be applied to their holdings of government debt.

The final details are still being agreed. But bankers have disclosed to me that they have been told to assess the strength of their balance sheets on the basis of the following haircuts.

Greek government bonds would be written down by around 17%, Spanish sovereign debt by around 10/11%, UK government by a marginally smaller discount than on Spanish debt, French by 6%, and German by 4 or 5%.

Now two numbers stand out for me.

First, that the discount on Greek debt is only 17% - when many analysts believe it needs to be written down by nearer 50%.

And then there is the almost identical haircuts applied to Spanish and British government debt.

Now the rationale for applying similar haircuts is that both Spain and the UK had very large public sector deficits in 2009: 11.2% for Spain and 11.5% for the UK.

But, as I've pointed out before, the UK has two advantages lacked by Spain when it comes to the affordability of its debt.

First, the maturity of its existing debt is much longer than for Spain: so on top of needing to borrow to finance the gap between spending and revenues, Spain also has to refinance maturing debt equivalent to 8.7% of GDP next year, compared with 3.8% for the UK.

So from that point of view, Spain is more exposed to the whims of lenders than the UK.

Also, most economists would argue that the UK's ability to service its debts is helped by having an independent currency, which adjusts to perceptions of its economic strength, rather than being locked into the euro - as is Spain - whose value is only partly determined by the performance of the Spanish economy.

That said, according to Eurostat - the EU's statistical arm - the UK's national debt at the end of last year was 68% of GDP, compared with just 53% for Spain.

In other words, and in the round, it is difficult for the UK to argue that a significantly smaller discount should be applied to its sovereign debt in the stress tests than would apply to Spain.

Even so, it's arguably quite embarrassing for the new coalition government that European regulators believe the UK's sovereign debts are of equivalent quality to what Spain has borrowed - and significantly worse quality than French and German government bonds.

Update 1556: By the way, I have a bit of additional ammunition for those who fear that the stress tests won't be robust enough.

What I've learned is that to pass the tests, a bank has to prove that its tier 1 ratio won't fall below 6% through the stressed cycle.

Now the important point about this 6% tier 1 figure is that it's calculated according to the widely discredited Basel ll formula: in other words, banks can include in their calculations of their capital resources various forms of capital that the recent banking crisis showed were more-or-less useless for absorbing losses.

Stephanie Flanders and I have written four short essays on the eurozone's financial and economic woes for Radio 4's PM. Here's the first of mine.
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The great fear of any sovereign borrower - that's a government trying to borrow - is that one day its request for money will be turned down.

Which would be a disaster. Because like the rest of us, when a government can't borrow, it can't meet its financial obligations, such as paying civil servants' and teachers' wages.

So why would investors - such as banks, pension funds or ordinary savers - stop lending to a government? Well (to state the obvious) they might come to the harsh realisation that said government has already borrowed more than it can afford to repay.

Earlier this year, Greece came within a whisker of suffering just such a strike by its lenders - which would have bankrupted the country if other eurozone governments hadn't agreed a 110bn euro rescue package.

What made Greece particularly vulnerable was partly its huge hunger for new funds - its annual deficit - equivalent to around 10% of its GDP on average every year from 2009 to 2011.

Also it has to repay big existing debts, worth more than 13% of its annual GDP, its output, both next year and the year after.

So - perhaps understandably - investors increasingly worried they wouldn't get their old loans back, and were reluctant to provide even more debt. They saw Greece as the equivalent of a family whose main bread winner has lost its job but which maintains its lifestyle by borrowing, in the hope that something will turn up.

One consequence was that the price of Greek government debt or bonds plummeted, such that the implied interest rate on this debt soared to a punitively high 40%.

That was the moment when Greece was more-or-less bust - and had to be rescued by the rest of the eurozone.

But what about other European countries? Are any others at serious risk of being shunned by investors.

Well those with the biggest deficits are Spain, Portugal and Ireland - and they're certainly the countries viewed by analysts as most financially fragile.

But a slightly different picture emerges when old debt due for repayment is added to the requirement for new borrowing.

On this basis, Belgium, Spain and France all face serious financing challenges - they all have to raise money equivalent to about 19% of their GDP this year. And Italy has to find a similar amount both this year and next.

As for Portugal, it faces its biggest financing test in 2011.

By contrast Ireland looks much better placed, because it has very little old debt due for immediate repayment.

However, before you get carried away with the idea that these eurozone countries are kaput, it's as well to provide a bit of international context.

As it happens, both Japan and the US are this year financing and refinancing much more debt relative to the size of their respective economies than any eurozone country.

And yet they're perceived to be much less likely to face an imminent financial crisis.

How so?

Well Japan has a vast captive population of small savers, all keen to lend to their government, intermediated traditionally by the postal system (as it happens, Italy looks like the Japan of Europe, with a substantial national debt financed by indigenous savers, via the banks).

And at a time of global uncertainty, the US is still the place where risk-averse investors place their money - even if that's not especially rational.

The great paradox is that eurozone governments are typically the most sceptical about the benefits of global financial capitalism - and yet they tend to be more at the mercy of international investors than other rich countries.

He confirmed that the government is actively looking at the introduction of a tax on financial activities and would examine the costs and benefits of such a tax on profits and remuneration.

And remember this tax would be in addition to the bank tax introduced in the Budget on money that banks borrow which is intended to raise £2.5bn a year.

What's more, Mr Hoban said that pressure would be kept up on bankers not to pay themselves excessive amounts for taking dangerous risks, by asking the City watchdog the FSA to examine what he called "further options" on all this.

All of which, in a way, underlines today's message in the Times[subscription required] from Stephen Hester, the chief executive of Royal Bank of Scotland, to his fellow bankers - which is that if the banks and bankers don't somehow improve their public reputation, they'll have policies foisted on them that they really don't like.

The resonant phrase he used is that "we have to earn the right to be heard".

And by the way, that right of audience hasn't exactly been bolstered by the FSA's damning critique of how banks provide mortgages: the soon-to-be put down watchdog is introducing tough new restrictions on the provision of mortgages, based on its findings that almost half of new mortgages between 2007 and March this year were provided without a bank demanding verification of a borrower's income.

Some may see the FSA's report as equally damning of consumers, in that they are characterised as systematically borrowing more than they can afford. Many consumers "count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all", it says.

Which is all very embarrassing for the great British home-owner. But the implication is that banks are the equivalent of drug dealers, feeding the borrowing habit of feckless individuals - so the FSA is stepping in to "ensure all lenders get back to the basics of responsible lending".

So how can banks transform themselves from social lepers to pillars of the community? Well Mr Hester wasn't specific - perhaps because he doesn't want to give away valuable commercial secrets to his rivals or possibly because this is easier said than done.

The closest he came to a specific policy was that banks must never again lend so much to commercial property (in the last years of the boom, 74% of all business loans went to property, he said).

And then there was a reflection from Mr Hester that might have been aimed at taxpayers or possibly at ministers, which is that surely they wouldn't be so down on investment banking if they only knew how banks help "our country to finance its deficit and protect public services" through direct purchases of gilts and by "helping sovereign debt markets function efficiently".

Hmmm. This is treacherous territory for Mr Hester.

If the Chancellor, George Osborne, saw it as more than a statement of the bloomin' obvious and as a veiled threat, well he might be marginally less bothered if the review of the structure of banks that he's commissioned were to recommend that banks should be cut down to size, by separating retail and investment banking.

Update 1030: Today's mortgage reforms from the FSA may well be seen as killing off interest-only mortgages (along with self-cert mortgages), which have been capturing a rising share of all mortgages (30% of mortgages at the peak of the housing boom).

It says that banks must assess whether a borrower can afford an interest-only mortgage not on the basis of whether they can afford the interest, but on a "capital and interest basis" - and also whether the borrower can afford to pay the whole thing off over 25 years, even where the actual term is longer.

So interest-only mortgages would in future only be provided to those who could afford normal repayment mortgages: cash-strapped individuals would no longer have the option of an interest-only mortgage.

BP this morning confirmed - among other things - that it has floated 587.12 miles of "containment boom" on the waters around the Gulf coast. So this famous shoreline is framed with inflatable plastic tubing longer than the distance from Edinburgh to Paris, to help prevent oil washing up on the beaches of Mississippi, Louisiana, Alabama, Texas and Florida.

I think we can safely conclude that manufacturers of this stuff, among others, are becoming rich on the back of the impoverishment of BP's shareholders. And with $3.5bn already spent by BP on limiting the impact of the Deepwater Horizon oil spill, BP is responsible for something of a mini Keynesian stimulus in the South East of the US.

Not that anyone with common sense expects the local community - rightly fearful for its fishing industry, tourism and wildlife - to be grateful. But it is an iron law of business that an ill wind usually creates business opportunities.

The most obvious manifestation of that dictum are the corporate vultures circling BP, attracted by a share price that's 42% where it was before the debacle in April - although in the last few days BP's market value has increased by more than a quarter.

At the head of the ominous colony of potential scavengers and predators are Exxon, the world's biggest oil company, and Chevron. They're salivating over all BP's assets, but especially its huge US operations.

"Our first reaction was how to help BP to quickly fix the problem... If there was some opportunity to work more closely together, we would welcome that".

Now, in a rational world, BP would be completely invulnerable to the circling hordes of hunters. Because the owners of the company, its shareholders, would be bonkers to even contemplate selling until they can quantify the long-term damage from the debacle, which is the sine qua non of establishing a fair price for the company.

It is, for example, perfectly possible to construct an argument that says the fair price for BP is only a few percentage points below where it was before the leak, even if the financial costs of the clear-up and compensation are well over $20bn - so long as you see those costs as, in effect, an increase in BP's long term debts or gearing.

But of course markets are not great repositories of rational thinking and behaviour, as I think we've had confirmed (if such were needed) over the past few volatile years.

So the board of BP was badly shaken when the implicit cost of borrowing for the company soared last month, because of apocalyptic fears that the pollution would never be staunched. And the directors are painfully aware that the ownership of the company will shift inexorably towards hedge funds and speculators who are only in it for the promise of a takeover or similar "value enhancing" deal.

As of now, however, the BP board appears to be holding its nerve - and concentrating all efforts on plugging the leak. Questions such as "who should own BP?", "who should be its chairman and chief executive?" and "should BP issue new equity?" have been put on the "après le deluge" list of business, when the permanent wreckage to reputation and financial prospects can be more calmly assessed.

In fact, the directors should probably be grateful for the speculation about opportunistic takeovers - because it has, for the first time in weeks, put some positive momentum behind the price of its shares and debt. That creates a slightly more benign financial climate for multi-faceted, climactic efforts to put a new cap on the leak, siphon more from the failed blowout preventer and - in a matter of weeks - stuff the leak up with "heavy" material.

During this short respite, before BP faces some kind of takeover bid (which it's reasonable to assume will surface in the autumn), governments and investors need to consider whether one lesson of this monumental mess is whether big is altogether good in oil.

Is there a credible case for saying that the bigger the company, the smaller the sense of personal responsibility over any well of that company's chief executive, and the greater the risk of disaster? Are the cost advantages of scale offset by the heightened risks stemming from the elongated chain of responsibility that also comes with scale?

It is at least moot whether the long term stable solution for BP is to subsume this already huge business into another company so enormous as to defy comprehension.

Quite apart from the traditional arguments about the harm to consumers from any diminution of healthy competition, mightn't the risks for investors and for society of further calamitous accidents be maximised if BP were devoured by another oil monster?

It might be called GOM Bank (for Grumpy Old Men Bank) or, more exotically, OMIAH Bank (for Old Men in a Hurry).

Either way, one striking characteristic of the bank being created by Sir David Walker, Lord Levene, Lord McFall and Charlie McCreevy is their respective ages: 70, 68, 65, 60 (actually some biographies of McCreevy say he's 61).

Another, of course, is that they're immensely distinguished and energetic.

But none of them have ever actually run - or even worked in an executive capacity for - a retail bank, which is what they want to create.

So the FSA will have to risk asking them some seemingly impertinent questions before authorising them to own or run a bank: how will they get some genuine retail banking experience on to the board; isn't there a risk to the continuity of the business from their respective ages?

And who's actually going to run the bank - in that they're all uber-grandees, non-executives par excellence, not in any sense dirty-hands executives?

As for the future employees of GOM Bank, they'll have every moral right to demand that they too can work way beyond 65 - which would create an intriguing operational problem.

Lots of you, however, will welcome their initiative, I am sure.

Retail banking in the UK is dominated by an oligopoly not that dissimilar in structure or membership from the oligopoly that ran British banking in the 1930s. So a bit of competitive tension would suit most consumers, though the history of British banking is littered with failed initiatives to create such competitive tension.

How does GOM Bank intend to become a serious player? Well it'll list itself as a shell company in the next few weeks. Endowed with £50m of cash from some investment institutions, it then hopes to buy a small bank and obtain a deposit-taking licence.

So far, so pedestrian. But GOM would then want to be seen as a credible bidder for the retail banking business that the European Commission is forcing Lloyds to sell.

Those 600 Lloyds branches, with a 4.6% share of the retail banking market and 19% of Lloyds' mortgage assets, is what GOM would most like to buy, rather than Northern Rock, the nationalised bank (which it sees as less appealing).

As you can gather, there are quite a few hurdles for these grumpy old men to vault before they're giving HSBC and RBS a run for their money.

But I've know all of them (apart from McCreevy) for more years than I choose to admit. And they're all gritty long-distance players who won't be put off by the odd obstacle.

It will matter to millions of current and future pensioners that the government is taking steps to uprate what they receive from private occupational schemes by consumer price inflation (CPI), rather than retail price inflation (RPI).

How much will it matter?

Well, in theory quite a lot, because the RPI has risen rather more than the CPI since the CPI began to be calculated some 22 years ago.

If a person starts drawing a pension at 60 and lives till they're 82 - which is not unrealistic on the basis of current mortality rates - that person would be receiving 16% less cash in the weeks before they died under CPI up-rating (on the assumption that CPI and RPI diverge over the next 22 years in the way they did over the past 22 years).

Which is a serious sum of money when expressed in that way - and for those on low pensions, could be the difference between hardship and comfort.

As for pension funds that are in deficit, that 16% fall in what they'd pay out to each pensioner would be seen as a welcome fall in their overall liabilities - though probably not enough to transform a sick pension fund, such as the Royal Mail's with its £10bn deficit, into a healthy one.

I hope I didn't hear you say "diddums" - because it is possible, you know, that a bit of your wealth is being managed by a hedge fund, via your pension scheme.

According to Hedge Fund Research's HFRX Global Hedge Fund Index, funds fell 0.94% on average in June and 2.79% in the three months ended June. This was, apparently, the worst second-quarter performance since 2000 when the industry lost 3.42%.

Now I'll admit that there is one aspect of this poor performance that gives me the kind of unworthy pleasure I enjoy when seeing a football team that I despise being thrashed (I think we all know which team I am referring to here - as it happens, its players receive hedge-fund-size wages and it is supported by a disproportionate number of hedgies).

What warmed my cockles were the significant losses incurred by those who bet large over the past few months on a collapse in the pound and in the price of gilts.

Because as someone who lives and works in the UK, I have no serious option but to be a supporter of team sterling. If the pound were to career downward in an uncontrolled way, if investors were to refuse to lend to Her Majesty's government, well that would be a fairly significant problem for the more financially immobile among us.

Of course, hedge funds are the definition of financially mobile institutions. So when the opinion polls before the election were predicting that the UK was heading for a hung parliament, a number of them bet that this would lead to paralysis in government and an inability to take serious measures to reduce the UK's record 11% public-sector deficit.

They weren't alone of course. You'll probably remember those telephone calls I received on the eve of the election from Sir Philip Green and Sir Martin Sorrell putting on record their fears that a hung parliament would result in dangerously ineffectual government (see my note Tory-backed business letter flops).

So for some hedge funds, the formula "hung parliament = fiscal deterioration = collapse in the pound and gilts" looked like a law of nature. And they placed their bets accordingly.

They discounted the possibility that a strong coalition - forged by a determination to cut the deficit - could be created.

And what adds to my amusement about their chronic miscalculation is that they had no understanding at all that a coalition could actually tackle the deficit faster and more credibly than a party with a working majority - because they failed to apply the portfolio theory of investment management to politics, on this rare occasion where it would have been a useful tool.

Here's the point: a government of Tories and Lib Dems could (and will) cut deeper and speedier than the Tories alone would have done (almost certainly), because the reputational risks can be distributed across two parties rather than focussed just on the one.

There's a wider point to be made here about what a confusing and difficult world it has become for hedge funds and short-term investors in general - largely because of the eurozone's financial instability (see my note Eurozone stress tests stress investors).

Right now the eurozone is a raging, boiling ocean of governments pushing and pulling each other over what to do about their members' excessive deficits and their weaker banks, coupled with powerful currents of liquidity added and then suddenly and dangerously withdrawn.

Discerning anything other than the big waves colliding is tricky - and predicting when it will all calm down is well-nigh impossible.

In the middle of all that, even a multi-billion dollar hedge fund looks like a vulnerable small craft.

The European Union's attempt to reassure investors that European banks are in reasonable health - by undertaking so-called stress tests on them - is shaping into a bungled exercise that may sow alarm rather than calm.

The names of the 100-odd banks being tested were supposed to be published today, along with details of the endurance tests to which they would be subjected.

The idea is that banks would have to demonstrate that they could remain solvent, even if eurozone economies continue to weaken and in spite of difficulties that some eurozone governments may have in paying their debts.

But investors' fears would only be allayed if the test results are published, if they are conducted in an open and transparent way, and if the stresses to which the banks would be subjected are realistic, not optimistic.

The tests are due in just over two weeks. But the German finance minister Wolfgang Schaeuble confirmed that individual banks may choose not to disclose the results.

And what may trouble investors even more is that the details they were expecting to receive this afternoon on the scope and substance of the tests, well none of that has been published, for reasons that have not been disclosed.

It would not be at all surprising if - in the coming 24 hours - the anxieties of banks' investors and creditors were to increase, with the damaging effect for eurozone banks that it may become harder and more expensive for them to raise finance.

UPDATE 19:34

At the eccentric hour of 7pm in Britain and 8pm on the continent, the Committee of European Banking Supervisors has published some of what was expected on the scope and scale of stress tests for European banks.

It says that 91 banks will be tested over the coming fortnight, representing 65 per cent of the EU banking sector.

What will reassure investors is that they include the Spanish and German savings banks which are deemed to be most fragile.

However bank investors and creditors may feel that the notional stresses to which the banks will be subjected are not described in enough detail - and some may also complain that the theoretical shocks which the banks have to withstand should be more severe.

The 91 banks will have to demonstrate that they would remain both solvent and liquid if the following adverse conditions were to pertain:

1) a 3 percentage point deviation from the expected course of GDP over the coming two years;
2) worse conditions in the government bond market than the pretty ropey conditions of early May.

Also for different countries, there would be different scenarios for the possible paths of GDP, unemployment and inflation.

On a superficial level, these tests don't look ludicrously easy to pass.

That said, the UK's Financial Services Authority thinks the tests are less difficult to pass than what it has forced on British banks. And as if to prove the point, it says it is already 100 per cent confident that Royal Bank of Scotland, HSBC, Barclays and Lloyds have all passed the European tests.

Also, the EU tests sidestep the issue that probably matters most to investors and creditors: what would happen to the banks if a Greece, or a Portugal or a Spain actually defaulted on what they owe?

It's all very well to tell banks that they need to assess the impact on their capital of a fall in the market price of Greek government debt, or Portuguese debt, or Spanish debt. But if a bank doesn't use mark-to-market valuations for all or some of their government bond holdings, then this would be an irrelevant test.

As I noted earlier, I fear that the way the EU is going about these tests will unsettle rather than reassure the banks' creditors and investors.

Marks and Spencer's shareholders won't know quite what to make of Stuart Rose's last months in charge - and nor, I suspect, will the chancellor of the exchequer or the governor of the Bank of England.

On the one hand, a goodish number of investors will embarrass the company at the forthcoming annual general meeting, by voting against the retailer's remuneration practices: they don't like the signing-on package awarded to the new chief executive, Marc Bolland, worth up to £15.1m, and they've been consistently uncomfortable with the magnitude of variable rewards paid to Rose and payable to others in the future.

On the other hand, M&S's sales performance for the past three months looks remarkably good: group sales rose 4.4%; UK sales were 4.8% higher; British general merchandise increased an impressive 7%, or 6% on an underlying, like-for-like basis.

The performance would look better still, by 0.4 of a percentage point in general merchandise, if adjustments were made for the absence of the moveable trading feast, Easter, from this year's figures.

None of which is redolent of an economy in the UK that is in theory only just getting off its knees after the deepest recession since the 1930s.

And according to the latest forecast produced for the chancellor by the Office for Budget Responsibility, household consumption in Britain is supposed to rise by a meagre 0.2% this year.

So is there evidence that consumers are spending more and saving less than the Treasury and Bank of England have been expecting?

M&S believes it is doing better than other retailers - which is characteristic of this venerable company in periods of economic uncertainty - such that its market share of UK clothing sales rose 0.50 of a percentage point to 10.7%. And it would plainly be wrong to read too much into statistics about three months of trading at a single retailer, even one as sizeable in clothing and general merchandise as M&S.

But making allowances for all of that, it's plain that British shoppers are feeling a bit more gung-ho than might have been expected.

As for M&S, it takes the view that one swallow doesn't make for an extended retailing summer, which is why its share prices has fallen this morning. Its statement says:

"We have made a good start to the financial year, but following the recent Budget and the actions proposed to reduce the national deficit, including the increase in VAT, we are cautious about the outlook for consumer confidence and spending and continue to manage the business accordingly."

With the coalition government announcing the biggest cuts to public spending in living memory, Rose is certainly getting his wish - though Rose would never have asked Santa for the VAT rise which is coming in January.

In the round, the outlook for retailers over the coming few years still looks pretty daunting.

The gross indebtedness of UK households remains at record levels - more than 100% of GDP - even as we all save a little bit more on average more than we had been doing.

On the assumption that households continue to endeavour over the coming few years to repair their finances by saving a bit more and spending a bit less, then - according to the Office for Budget Responsibility - household consumption will increase at an annual rate of 1.9% over the five years from 2011 to 2015.

That may not look too bad, but is around a quarter less than the annual average growth rate of 2.5% in household consumption during the boom years from 2003 to 2007.

One way of looking at this is to say that for consumer-facing companies, the lower trends to household spending will cost them around £20bn in lost sales every single year by 2015.

So retailers can probably discard any hope of a return to the golden years of the decade before 2007 and it would be sensible to assume that we haven't seen the last retailing bankruptcy of this phase of the cycle.

Nor is that as bad as it could get. If inflation were to rise in a way that looked endemic rather than short term, such that the Bank of England felt obliged to raise interest rates, then there would be a profound squeeze on consumers' spending power - and retailers would be back in the hell of late 2008.

It happened in the latter days of the last government and is being entrenched by the new coalition government.

I refer to a profound shift away from the idea that there should be the freest possible market in the buying and selling of whole companies.

The ideology of the 1980s, which persisted really until last year, was that it was good for Britain that no company could feel secure from the threat of being acquired by another business.

The theory was that economic growth would be generated by a kind of economic Darwinism: weaker companies would be gobbled up by stronger ones; second-rate management would be kicked out; productivity of the enlarged group would be enhanced; and the proceeds from any takeover would be reinvested in new wealth-creating opportunities.

So who could possibly be against takeovers?

Well only those who noticed that - more often than not - takeovers appeared to be driven less by carefully crafted wealth-creating strategies and more often simply by a crude desire to turn a big company into an enormous one.

Why would that be?

Well, the chief executive of a ginormous company is typically paid a multiple of what he or she would pocket if running a middle-size one.

And there are massive fees for the bankers, lawyers, accountants and PR firms advising on such deals.

The phrase "gravy train" could have been invented for the takeover industry.

Also, it is usually much less hassle for institutional shareholders in a weak company to sell the company rather than kick out the inadequate management. And selling at a premium makes the investment performance of said shareholders look better than average, for a short time at least.

So for decades there's been this great big thriving market in whole companies.

And never mind that there has been evidence for many years that the performance of companies bloated by takeovers is often pretty poor, or that many of the acquirers are overseas interests, which raises questions about the ability of the UK to control its economic destiny, or that periodically such deals are disastrous.

Latterly however, and to use that ghastly cliche, some kind of tipping point has been reached.

Partly it was the storm of protest generated by Kraft's acquisition of Cadbury - though it's pretty difficult to demonstrate that selling Cadbury to US interests is more damaging to British economic interests than any number of other cross-border deals of recent years.

Partly it was the sight of deal-bloated monster companies - the likes of Royal Bank of Scotland and BP - beached and struggling for survival, or the proof that with the fat spilling over a certain belt size, businesses become harder to manage, more inefficient, riskier.

So what will the new business secretary, Vince Cable, do about all this?

Well three things.

First he may insist that all big deals are subject to a period of lengthier advance notification scrutiny, by competition and other regulators, as well as by investors, before a formal offer is put on the table and the formal takeover clock starts ticking. The pros and cons of the deal could then be discussed in a less fraught and pressurised climate than that which pertains once the deadline looms for shareholders to say yea or nay.

Second he may massively push up the so-called merger fees payable to the Office of Fair Trading for examining the competition implications of any deal. These are currently a maximum of £90,000, which isn't even big enough to be described as a rounding error for any takeover.

My understanding is that these fees are likely to be increased sufficiently to add a bit of grit in the takeover wheel, to increase the costs of a takeover sufficiently so that the acquiring management thinks a bit harder and longer before pouncing on prey.

And finally he'll keep an eye on the Takeover Panel's review of the rules of the takeover game, and if it doesn't tilt the playing field to make it harder for deals to be completed, well he could legislate.

What he would want to see from the Panel would be a reform that would make it harder for short-term speculators to deliver a business into the arms of a predator, either by disenfranchising shareholders who've owned stock for only a few weeks or by lifting to 60% or so the voting threshold for deeming a takeover to have succeeded.

All of this will trigger panic attacks in a variety of City firms who live off the fruits of the takeover trade.

Few of you will worry about that. But it might be wise to question whether this reform could do more harm than good if unaccompanied by other reforms.

The British disease, historically, is that management becomes self-satisfied, fat and lazy if not made to feel anxious that the punishment for poor performance would be defenestration.

If that death sentence is no longer to be delivered by an acquiring company, it has to be pronounced by shareholders.

So if the takeover market is to shrink by government fiat, there is a risk to the productivity of the UK unless and until the owners of business can be persuaded to become active and engaged owners, rather than the absentee landlords whom you regularly read about here.

Would you pay good money to look like members of the England team? Would you bank with an organisation whose values are those of England's £160,000 per week "stars"?

I suspect that many of you would prefer to pay good money to distance yourselves from footballers who've been widely criticised for failing to perform as a team and as individuals, and for behaviour off the park widely seen as churlish and selfish.

In modern times, I cannot remember a similar descent from hero to zero of any sporting individual or team, even those accused of cheating.

And the reason, of course, is that the high hopes of a nation were dashed not simply by an incompetent performance, but by a collective inability of the players to show esprit de corps and national pride, or to apologise and explain.

So when the players were filmed still wearing their official Marks & Spencer suits as they disembarked in England last week, having been trounced by Germany and then not bothering to thank the thousands of England supporters who had paid fortunes to cheer them through thick and thin, all I could think was that Mr Marks and Mr Spencer would be gyrating rapidly in their tombs.

Also, quite how comfortable does Nationwide's board feel that their logo is impossible to miss when England players are interviewed or when supporters click on to the official England website?

This England team represents the diametric opposite of what the M&S and Nationwide brands are supposed to embody.

The Nationwide, as the largest building society, characterises itself as the antithesis of supposedly high-charging, bonus-driven banks and - by implication - the antithesis of footballers who won't get out of bed for less than 100 grand.

As for M&S, it would be a frail thing if its reputation for offering quality at an affordable price was seriously impaired. Yet the 23 members of the England squad, whose collective annual earnings (including sponsorship) are considerably more than £100m, are symbols of something else.

It will be fascinating to see whether the market as it relates to the earnings of the FA and footballers will operate in an efficient way.

If it does, the sponsorship earnings of individual members of the England team will collapse. And the FA will suffer a significant fall in income, when it seeks to persuade the Nationwide to renew as official team sponsor or tries to find a new sponsor (the deal with the Nationwide expires this month).

Were the FA and the team hit where it hurts, in their wallets, there would be a pretty powerful incentive for players and FA to learn the lessons of the debacle in South Africa. Market forces would spur renewal rather than embedding decline.

If however the money continues to gush in, then - as David Bond implied in a recent post contrasting regulated German football with free-market England -we would surely have to conclude that the global commercial success of the Premier League etiolates the national team (although the relative success of the Spanish team challenges the idea that it's utterly impossible to build a great national team on the back of phenomenally wealthy club teams).

The panoply of diverse financial reforms that are being discussed and implemented by governments all over the world are aimed at embedding the principle that the polluter should pay into banking.

Whether it's the requirement that owners of banks should put more of their equity capital at risk, or the imposition of new taxes on what banks borrow, or even the planned resolution procedures which aim to protect "innocent" depositors while heaping losses on more sophisticated creditors and investors, they're all attempts to prevent a repeat of what happened in 2007-8, when the losses of banks were nationalised and born by taxpayers to a wholly unprecedented extent.

The underlying problem is that the global economy is so dependent on credit and payments services provided by banks that we dare not allow big banks to collapse. So somehow we have to find a way to punish and wipe out the owners and institutional creditors of banks without wiping out those banking operations that are vital to our prosperity.

Tricky - but important.

As it happens, oil is probably as vital to the functioning of the global economy as credit creation and money transmission. And right now, in the oil industry, we have an apparently conspicuous example of a polluter paying, BP.

So are BP's woes an example of what we would wish to see in the banking and finance industry?

There are certainly very interesting similarities between the debacle at BP and what happened at the likes of Royal Bank of Scotland, Northern Rock, Citigroup, HBOS, AIG and so on.

The first is that neither BP or any of the big banks took out external insurance - or at least sufficient external insurance - for what have come to be known as low risk, high impact events.

The banks became lethally dependent on raising finance by parcelling up loans and selling them to international investors on asset-backed securities markets. And they had no plan B when those markets shut down in the summer of 2007 and the finance dried up. They had taken out no insurance to cover the funding gap.

At that point, they could not borrow what they needed, and so become unable to lend what businesses and households required. That was the beginning of what we called the "credit crunch", which led directly and inexorably to both global recession and the near meltdown of the entire financial system in the autumn of 2008.

In a very similar way, BP had a formal policy of not buying external insurance against possible disasters. Here is the relevant excerpt from its 2009 report and accounts:

"The group generally restricts its purchase of insurance to situations where this is required for legal or contractual reasons. This is because external insurance is not considered an economic means of financing losses for the group".

Hmmm. I suspect the board of BP would concede they got that one wrong - as the company faces uninsured losses that are expected to exceed many tens of billions of dollars, the monetary measure of all that oil spewing from the Macondo well and poisoning the Gulf of Mexico.

President Obama has been adamant that BP will pick up all the direct costs of the disaster and many of the indirect costs. Which BP can obviously do unless and until it is bankrupted.

Or to put it another way, the principle that the polluter pays only works if the polluter is kept alive long enough to finance and execute the clean-up. The US government therefore needs to be mindful to calibrate its onslaught on BP in a way that doesn't scare off providers of vital credit to the oil company and tip it into bankruptcy.

Damage has already been done, however, to the aspiration that commercial companies should bear all the costs of oil extraction. The adversarial nature of the relationship between the White House and BP probably means that even if a company like BP wanted to take out catastrophe insurance for platforms operating in deep waters, the market would probably be closed.

So like it or not, if it's felt that the world needs the oil from more treacherous locations, the public sector and taxpayers may find they are underwriting some of the risks - unless, that is, the big oil companies themselves can be persuaded to mutually insure each other.

I suppose the big point is that even in the oil industry, it's very difficult to make the polluter pay everything. Whether its finance or energy, taxpayers and states cannot escape exposure to some pretty big liabilities.

Which points perhaps to one of the most puzzling failures of all - which is why the owners of the banks and BP have been so hopeless at looking after their own interests.

Even if shareholders of banks haven't paid their fair share of the cost of cleaning up the worst banking crisis since the 1930s, they've paid quite a lot, in collapsing share prices and cancelled dividends.

They barely raised a titter of protest when the banks were taking reckless risks with their money between 2001 and 2007. And even today, as the Bank of England points out, they're permitting banks to deprive them of vital dividends while handing out colossal remuneration to bankers: shareholders seem to be singularly unable to defend their own interests (with the exception, I should point out, of hedge funds - which will doubtless upset many of you, and is a story for another day).

Equally, did any shareholder in BP notice that it was self-insuring and question whether that was appropriate? In the unlikely event that they did, why did they keep their fears private given the refusal of the company to lay off the risks of its activities?

As luck would have it, the Financial Reporting Council has today published a new "stewardship" code for institutional shareholders, filled with worthy principles for investors to follow in the hope this turns them from absentee landlords into engaged, constructive owners.

It's a start, most would say. But the culture of neglect that arguably infects the big institutions that own our biggest businesses (on behalf of us, because it's our savings that they're investing) won't quickly or easily be cured.

BBC links

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